FOREVER BUSINESS LTD. v. LONG SURPLUS INTERNATIONAL INVESTMENT LTD.

HCMP 1630/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1630 OF 2005

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BETWEEN

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J U D G M E N T

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1.  This case concerns a provisional agreement (“the Agreement”) for the sale by the plaintiff and the purchase by the defendant of a restaurant at the Ground Floor, No. 9 Sing Woo Road, Happy Valley, Hong Kong (“the Property”) at a price of $22,000,000.  The sale did not proceed.  The plaintiff seeks a declaration that the Agreement was wrongfully repudiated by the defendant, and that it has validly accepted the wrongful repudiation; a declaration as to its right to forfeit the initial deposit of $1,000,000 paid by the defendant; and an order for the vacation of the registration of documents.

The facts

2.  The facts are set out in the affirmation evidence of the plaintiff’s director, Mr Chan Wai Hung, the defendant’s director, Mr Lee Hon Keung, and the plaintiff’s solicitor, Ms Grace Fung Yu Sin, but primarily they appear from the correspondence between the parties’ solicitors.  In the beginning, the plaintiff’s solicitors were Messrs K C Ho & Fong (“KCHF”) and later the plaintiff instructed Messrs Wilkinson & Grist (“WG”).  The defendant’s solicitors were Messrs Kok & Ha (“KH”).

3.  The Agreement was the usual kind of provisional agreement, written on a printed Chinese form prepared by an estate agent, Midland Realty (Retail) Ltd and signed by Mr Chan Wai Hung, a director, on the plaintiffs behalf, by Mr Lee Hon Keung, a director, for the defendant, and by the agent’s representative, a Mr Wu.  It is dated 16 April 2005 and provided for an initial deposit of $1,000,000 which was paid on the same date.  Completion was scheduled for 28 October 2005, and there was provision for the execution of a formal agreement and the payment of a further deposit on 3 May 2005.

4.  Clause 3 of the Agreement provided that the Property was sold “free from incumbrance or indebtedness” but there was no provision as to how title was to be shown.  That would no doubt have been provided for in the formal agreement.

5.  On 20 April 2005, KH wrote to KCHF to the effect that when the Agreement had been made, the estate agent, Mr Wu, had represented to the defendant that the existing cockloft in the Property was an approved building structure.  However, the defendant had subsequently been advised by its intending mortgagee bank that the cockloft was likely to be unauthorised.  KH referred to Clause 3 of the Agreement and asked for confirmation, with satisfactory evidence, that the cockloft was approved and authorised.

6.  On 28 April, KCHF replied to the effect that the plaintiff had never authorised the estate agent to make any representation, but was checking with the agent.  In any event, they said, according to Clause 11 of the Agreement, the Property was sold “as is”, and therefore the plaintiff had no obligation to reply on this point.  On the same day KCHF sent a draft formal agreement and asked for its execution and return with the further deposit.

7.  Still on the same day, KH replied, again referring to Clause 3, and giving their opinion that Clause 11 merely referred to the physical state and condition of the Property and could not be relied on to force the defendant to accept a defective title.  Unless the cockloft could be proved to be authorised, the defendant would regard the plaintiff as in repudiation of the Agreement.  This was followed on 3 May by another letter to the effect that KH were convinced that the cockloft was unauthorised, and that the defendant accepted the plaintiff’s repudiation and demanded return of the deposit.

8.  In the meantime, the plaintiff instructed WG.  On 6 May 2005, WG wrote to KH to the effect that the Agreement provided for payment of a further deposit on 3 May 2005, which had not been paid, and giving the defendant until 13 May to pay it, or else the plaintiff would regard the defendant as being in repudiation and forfeit the paid deposit of $1,000,000.  They also demanded execution of the formal agreement.  As to the cockloft, WG opined that the obligation to pay the further deposit was not conditional on proof of title and that a vendor need only establish good title by the time of completion.

9.  KH then proceeded to make inquiries with the Building Department.  They obtained letters from that department to the effect that there was no record of approved building works on the subject lot, and that there was no record of an occupation permit being issued by the Building Authority in respect of the captioned premises.  They wrote to WG on 12 May 2005 to this effect.  They said that the occupation permit was necessary to prove title; it was most unlikely, if not impossible that an occupation permit could be issued, and therefore the plaintiff was incapable of proving or giving a good title by the agreed completion date.  This amounted to an anticipatory breach of the Agreement, which the defendant accepted.  Return of the initial deposit was again demanded.

10.  WG then obtained an opinion from an architect, Mr Kenneth C Y Kan of Chan, Kan & Associates Ltd dated 30 May 2005.  Mr Kan referred to an assignment memorial dated 24 July 1947 as the basis for his opinion that the building must have been constructed and completed before that date.  He said that the records had been searched, and in respect of the cockloft it was found that this was part of construction works which had been approved in 1964.  He went on to say :

“‘It is a common fact that the Building Authority has lost most records of building completed during the pre-war or immediate post-war period as is the case with that of the building where the Property.  The loss or unavailability of such records should not prejudice the legal status of the building concerned.  In the case pertaining to the Property, the legal status is supported by the fact that there are approved building and structural plans regarding the essential alterations and additions works as now found at the Property.  The status is further supported by the fact that licences for the operation as a general restaurant and the Ground Floor and Cockloft and as a bakery at the Cockloft have been issued annually by the Director of Food and Environmental Hygiene since 1992/93….’

On the basis of the above I hereby certify that despite the unavailability of records of the approved building plans and Occupation Permit in the Buildings Department regarding the building where the Property is located, there is no legal complication regarding the building works found at the Ground Floor and Cockloft or the Property as a whole…”

11.  On 1 June 2005 WG sent a copy of this opinion, with its attached plans, to KH.  WG dealt at length with the points raised earlier, and said that they had more than adequately addressed the purchaser’s objections.  Accordingly they called on the defendant to pay the further deposit, or be regarded as having repudiated the Agreement.

12.  KH replied on 3 June 2005.  They said that the plaintiff was in anticipatory breach, “as there is no way an occupation permit can be made available before completion”.  They went on to say that the plaintiff had a duty to disclose, before entering into the Agreement, that it could not produce an occupation permit.  In the absence of such disclosure, the defendant entered into the Agreement, trusting that an occupation permit was available, as would normally be the case.  They indicated that the defendant would not proceed with the purchase.

13.  Further correspondence between solicitors, well larded with legal authorities, followed on from this.  In particular WG set out the plaintiff’s position in its letter of 9 June 2005, which was that

(1)     There was no provision as to when a good title had to be shown and therefore the plaintiff did not need to show it before the date of completion; i.e. 28 October 2005;

(2)     The cockloft was authorised and approved;

(3)     As to the occupation permit, that was normally used to show compliance with the Buildings Ordinance when the building was constructed.  Compliance was significant because it may be a condition for the grant of the lease, and non-compliance may lead to enforcement action being taken by the Building Authority, rendering the title defeasible.  In this case, however, while there was record of an occupation permit, this did not mean that none was ever issued; it was probably issued and lost.  Compliance with the Ordinance could be proved by other means, and there were facts and circumstances sufficient to show that this pre-1947 building had been constructed in compliance with the Buildings Ordinance 1935, then applicable.  The approval of the cockloft and the renewal of the Crown lease in 1988 were referred to, inter alia.  The non-production of the occupation permit would not render the plaintiff’s title defective and in any event the plaintiff was entitled to time, until completion, to answer any requisitions or objections to the title.

14.  KH did not agree with these assertions and the sale and purchase did not go ahead.  Ultimately the plaintiff, through WG, purported to forfeit the deposit paid, and issued these proceedings.

15.  From the affirmation of the defendant’s director, Mr Lee, it appears that the defendant, having signed the Agreement, then sought to finance the purchase but met with difficulty.  Mr Lee approached three banks, but the best valuation he could get for mortgage purposes was $17 million.  A representative of one bank explained to him that the bank could not obtain higher valuation because the cockloft was an illegal structure.  In fact the estate agents selling the Property, Mr Wu and Ms Wong, had represented to Mr Lee that the cockloft must be legal, otherwise the restaurant licence would never have been granted.  This was the basis for KH’s requisition in respect of the cockloft, by their letter of 20 April 2005.  There is some evidence from the plaintiff’s solicitor as to the status of these agents; it was such that, under one of the provisions of the Agreement, they did not have authority to make any agreement, assurance or representation on behalf of their company.

16.  There is also evidence from Mr Lee that the agents did not disclose to him that the building of which the Property forms part did not have any occupation permit, and there was nothing to about the building to suggest to him that it might be a pre-war building or one without an occupation permit.

Issues

17.  Ms Tong, counsel for the defendant, summarised the defendant’s case thus.  She said that the defendant was entitled to terminate the Agreement before the completion date because of three matters.  In the first place, there was never any disclosure to the defendant that the building had no occupation permit.  In the second place, the refusal by KCHF properly to answer the requisition on the cockloft amounted to an anticipatory breach of the Agreement, which the defendant accepted by KH’s letter of 3 May 2005.  In the third place the absence of the occupation permit is a defect in title, which makes it impossible for the plaintiff to show or give a good title on completion; and that also amounts to an anticipatory breach of the Agreement, which the plaintiff accepted by KH’s letter of 12 May 2005.

18.  In fact, as we now know, the cockloft is a legal structure, so there is no defect in the title there.  Whether or not the agent’s representative had authority to make representations binding on the vendor, there was no misrepresentation in respect of the cockloft.  However, the issue remains as to whether KCHF’s blithe assertion that Property was sold “as is”, and therefore the plaintiff had no obligation to reply to the requisition, amounted to a repudiatory breach.

19.  The other arguments relate to the occupation permit.  Normally the occupation permit is a necessary document to prove title.  Its absence is a material defect in title.  If the vendor cannot produce an occupation permit, the purchaser may be able to rescind the contract unless the vendor can demonstrate that there is no real risk that the purchaser will the subjected to enforcement action on the part of the Buildings Authority.

20.  Here, the plaintiff argues that the building does not require an occupation permit under the Buildings Ordinance as it is currently constituted, and therefore the Buildings Authority has no power to take any enforcement action; but if it does, there is no real risk of such enforcement action.  The defendant argues that if the building does not require an OP under the current Buildings Ordinance, it required one under an earlier, repealed version, under which the Authority may still take enforcement action, and there is inevitably a real risk of such enforcement action. 

21.  There are therefore two issues on the occupation permit, the first being the statutory requirement for it and the second being whether there is a real risk of enforcement action.  Any question of the necessity for disclosure of the lack of an occupation permit is secondary to these issues.  If it was not necessary, or there was no real risk of enforcement action, there would be no duty on the vendor to disclose its absence. 

The Cockloft

22.  It seems that there is no real dispute that KCHF’s assertion that the Property was sold “as is” under clause 11 of the Agreement, and therefore the plaintiff as vendor had no obligation to answer the defendant’s requisition, was wrong.  If a vendor relies on the terms of the contract to shift the risk of any defect in title to the purchaser, the language must clearly do that; see All Ports Holdings Ltd v Grandfix Ltd [2001] 2 HKLRD 630 at 643.  Clause 11 does not appear to be clear enough. 

23.  It is argued that KCHF’s assertion amounted to an unequivocal renunciation of the Agreement which the defendant accepted by KH’s letter of 3 May 2005.  The contract was at an end and it could not be resurrected by the plaintiff’s subsequently showing that there was no defect in title in respect of the cockloft.

24.  Renunciation must be clear and unequivocal.  It must be “made quite plain”.  See Chitty on Contracts, 29^th Edition, §24-019 :

“Where there is a genuine dispute as to the construction of a contract, the courts may be unwilling to hold that an expression of an intention by one party to carry out the contract only in accordance with his own erroneous interpretation of it amounts to a repudiation, and the same is true of a genuine mistake of fact or law”.

25.  The simple fact is that the plaintiff’s solicitors made a mistake as to the interpretation of the contract.  On the same day, but under separate cover, they sent KH a draft formal agreement for sale and purchase, along with their request for payment of the balance of deposit.  That letter clearly showed the plaintiff’s intention to perform the Agreement and go ahead with the transaction.

26.  I have not been shown the draft formal agreement, but it would probably include provisions for raising requisitions and showing good title; and if it did not, a term would be implied into it, putting an obligation on the vendor to show a good title.  See Active Keen Industries Ltd v Fok Chi Keong [1994] 1 HKLR 396, C.A.  Furthermore, such obligation would, if the formal agreement was silent as to when it was to be performed, have to be performed within a reasonable time before completion, which was scheduled for 28 October 2005.  If the plaintiff did not have to show a good title until then, it is difficult to see how any refusal to do so, even if erroneous, at such an early stage could be indicative of renunciation.

27.  I do not see how the defendant could properly seize on a simple, but erroneous assertion by the plaintiff’s solicitors as to the vendor’s duty to answer a particular query in respect of the title, at an early stage when there was as yet no formal agreement with provisions, express or implied, as to when title had to be shown, as an unequivocal renunciation of the Agreement.

28.  Objectively, there was no anticipatory breach.  I do not think it is necessary to go on to consider whether KH’s letter of 3 May is or is not to be seen as an objective acceptance of breach, though it is difficult to see how it could have been, because the correspondence carried on, and KH never insisted that the Agreement was already at an end but rather changed its stance to rely on the occupation permit point.  But in my view that does not matter.  There was no unequivocal renunciation which could be accepted.

Occupation Permit

29.  Section 21 of the Buildings Ordinance, Cap 123 provides that no new building shall be occupied in any way except by no more than two caretakers unless the Building Authority has issued an occupation permit or a temporary occupation permit.  The Authority may refuse to issue an occupation permit where any part of the building works has been carried out in contravention of the Ordinance, and in other specified circumstances. 

30.  If the Ordinance has not been complied with, there is a obviously a real risk of enforcement action by the Building Authority.  Examples of such action are given in Lui Kwok Wai & Anor v Chan Yiu Hing & Anor [1995] 1 HKC 197, at 201A.  The court noted that the Crown could re-enter and forfeit the Crown lease on the basis that the new building was not constructed in compliance with the terms of the Crown lease.  It could also order demolition of a building which was not authorised or approved, or alternatively it could impose a premium for the continued use of the building.

31.  The power to order demolition is provided by section 24, where any building has been erected in contravention of “any provision of this Ordinance”.  In addition to this and the other examples set out above, the Ordinance also makes the occupation of a building, in the absence of an occupation permit, a criminal offence.  The penalties include a daily fine of $5,000 where the offence is continuous.

32.  An occupation permit is therefore regarded as a relevant and necessary document to prove title.  It is evidence that the provisions of the Buildings Ordinance have been fully complied with in the construction of the building.  In the absence of an occupation permit, the court may hold that the vendor has failed to show or give a good title.  However, the vendor may prove compliance by other means: Chen Paul v Lord Energy [1998] 1 HKC 702 (CA), 1999] 1 HKLRD 205 (CFA).

Was an occupation permit necessary in this case?

33.  The plaintiff says that it was not.  Section 21 of the Buildings Ordinance applies to a “new building”.  By section 2 of the Ordinance, “new building” :

“means any building hereafter erected and also any existing building of which not less than one half measured by volume is rebuilt or which is altered to such an extent as to necessitate the reconstruction of not less than one half of the superficial area of the main walls.”

As Mr Man, counsel for the plaintiff points out, the building concerned here was erected, as appears from the documents attached to the architect’s opinion, in or before 1947.  The current version of the Buildings Ordinance came into force on 1 June 1956.  The building did not, therefore, need an occupation permit under the Buildings Ordinance, because it was not a new building and there is no evidence of later alteration such as would make an occupation permit necessary.

34.  Mr Man argues that the occupation permit is evidence of compliance with the Buildings Ordinance. Such compliance is significant because it is often a condition of the grant of the certificate of compliance and the Government lease, without which one holds only an equitable estate, and because non-compliance with the Buildings Ordinance may lead to enforcement action by the Building Authority, rendering the title defeasible.  There is no problem here with the Government lease; the Crown lease was renewed in 1988.  As to action by the Building Authority, Mr Man argues that there is no real risk of it.

35.  Ms Tong, counsel for the defendant, argues that there is no proof that there was no rebuilding or alteration since 1956, and the onus lies on the plaintiff to prove it.  In any event, the building would require an occupation permit under the previous Buildings Ordinance 1935, (18 of 1935) (“the 1935 Ordinance”).  That was repealed, though the repeal was subject to certain savings provisions which are not relevant here.  However, says Ms Tong, section 137 of the 1935 Ordinance also required the issue of an occupation permit for a new building before it could be occupied; and the Authority had similar enforcement powers under the 1935 Ordinance as it has now, under the current Ordinance.  In the 1935 Ordinance, “new building” was defined as including any building begun after 21 February 1903, any existing building which was altered (to a specified extent) and certain specified building conversions.  So the building would require an occupation permit when it was constructed, be that pre-war or in 1947.

36.  Ms Tong argues that the effect of section 23 of the Interpretation and General Clauses Ordinance, Cap. 1, in particular
sub-sections (c), (d) and (e) is that the Building Authority still has the power to take enforcement action under the 1935 Ordinance.

37.  Section 23 is the general savings provision in respect of repeals.  Subsection (c) operates to save rights, privileges, obligations and liabilities acquired, accrued or incurred under the repealed Ordinance.  Subsection (d) operates to save any penalty, forfeiture or punishment incurred for an offence committed under the repealed Ordinance and subsection (e) operates to allow investigations and legal proceedings, whether civil or criminal, commenced under the repealed Ordinance to continue, and to allow existing remedies to be enforced and penalties and punishments to be remedies and punishments to be imposed.

38.  Reference is made to the case of Siu Sau Ying v Ho Lun Tong [1963] HKLR 607 in which subsection (c) was invoked to keep alive a right to an occupation permit acquired under the 1935 Ordinance in 1948 so as to allow the permit to be issued in 1967 under the current Ordinance.  I do not see that this assists.  What is concerned here is not a right acquired under the 1935 Ordinance, but whether the enforcement powers under that Ordinance still exist.

39.  It is obvious that the Authority could not seek a demolition order against the building under section 24 on the ground that it had been erected in contravention of any provision of the current Ordinance, because it was erected before the current Ordinance came into force.  Nor could it prosecute anyone under section 40 for occupying the building without an occupation permit, because section 21 does not apply to any but a new building.

40.  As to whether the Authority could now take action against the defendant under the 1935 Ordinance, I do not wish, in this conveyancing matter, to engage in any lengthy discussion of statute law and how it works, but it seems to me to be a pretty elementary proposition that once a law is repealed, it is dead, and the powers it grants can no longer be exercised except where there are transitional provisions and to the limited extent provided in subsections (d) and (e) of Cap. 1. 

41.  I do not see how any new owner could now be prosecuted under the 1935 Ordinance.  If no occupation permit was ever issued, then perhaps a person who occupied the building before 1956 could still be prosecuted now (if anyone thought it worth while, for the maximum fine of $500 which could be imposed), but the prosecutor would have to prove that no occupation permit was issued.  Given the evidence of loss of records, the fact that there is now no record of an occupation permit would not be sufficient for the court to infer that none was ever issued.  The prosecution would not succeed.

42.  I have not been shown all the sections of the 1935 Ordinance.  I have been shown section 166 which gives a magistrate power to order demolition of illegal cocklofts, partitions and shop-divisions, but that is irrelevant here.  If the Authority had any power of demolition under the 1935 Ordinance equivalent to that provided for by section 24 of the current Ordinance, and if it could still exercise that power, it would have to be satisfied that the building, whenever erected, was not constructed in accordance with the provisions of the 1935 Ordinance before it could order demolition.  In the absence of records that would be impossible.

43.  It appears to me, therefore, that the Authority simply does not now have the power to take any action against a new owner on the ground that the building, when erected, did not comply with the Buildings Ordinance then in force; or if it does have any such power, that power could not be exercised, because the facts on which it could be exercised cannot now be proved.  It follows that the production by the vendor of an occupation permit is simply irrelevant and unnecessary.

Real Risk of Enforcement Action

44.  In case I am wrong, and enforcement action can be taken, I will consider whether there is any real risk of it. 

45.  A good title need not be a perfect title.  In MEPC Ltd v Chistian-Edwards [1981] AC 205 at 220 Lord Russell of Killowen said this :

“If the facts and circumstances of the case are so compelling to the mind of the court that the court concludes beyond reasonable doubt that the purchaser would not be at risk of a successful assertion against him of the encumbrance, the court should declare in favour of a good title shown.”

46.  In Lui Kwok Wai, cited above, the vendor could not produce either an occupation permit or a certificate of exemption issued under sub-section 4 or 5 of the Buildings Ordinance (Application to the New Territories) Ordinance, Cap 121.  All that the vendor could produce was a letter issued by the District Lands Office which stated that while no occupation permit was necessary, the Government reserved all its rights to take what action it deemed necessary in view of the amalgamation of house lots and the erection of houses thereon, which included the suit property.  The court applied the principle stated by Lord Russell in MEPC Ltd v Christian-Edwards and held that the possibility of enforcement action by the building authority was real, and therefore that the vendor had not satisfactory answered the requisition on title, and that the title was defective.

47.  Ms Tong has cited a number of cases which in which the court followed Lui Kwok Wai, but it is not necessary to discuss them here, for they are simply illustrations of the same principle; and there is no dispute that if an occupation permit were a necessary and relevant document to prove title in this case, the principle would apply.  Ms Tong deduces from these cases that it is well-nigh impossible for a court to be satisfied, in the absence of an occupation permit, that there is no real risk of enforcement action.  That may be so, in the case of new buildings, especially those in the New Territories (from where those cases originated); but the question is whether there is a real risk in this case.

48.  In Spark Rich (China) Ltd v Valrose Ltd, CACV 249 of 1998, an unauthorised structure case, Godfrey JA said this about the test of what is a real risk :

“It is impossible to formulate any test as what is a real risk and what is a risk which is not real.  So this is of little help.  It is more helpful to state that if, in an “unauthorised structure” case, the court concludes that, beyond reasonable doubt, the purchaser will not be at risk of any successful action against him by the Building Authority, it should declare in favour of a good title shown : cf. MEPC Ltd v. Christian-Edwards [1981] AC 205, per Lord Russell of Killowen at p.220 (followed here in Kan Wing-yau v. Hong Kong Housing Society [1988] 2 HKLR 187 : see per Clough J.A., at p.194).

Now, the burden of showing a good title falls on the shoulders of the vendor.  He must, therefore, in an “unauthorised structure” case, satisfy the purchaser (or, failing him, the court) that the risk of such action is one which a purchaser can safely be advised to disregard.

So the test may be usefully framed as follows : If the purchaser asks his solicitor : “Can I be sure that I can safely disregard the risk?” then, unless his solicitor (being a prudent and experienced solicitor) can properly advise him that he can, the purchaser cannot be obliged to accept the vendor’s title, even if supplied by the vendor with opinion evidence to the effect that action by the Building Authority was unlikely.”

49.  Here the building has been standing since at least 1947, in Happy Valley; it is not some building knocked up recently by a fly-by-night builder in a village in the New Territories.  It seems inconceivable that the Building Authority would not have known of the construction and occupation of the building, whenever that happened, or that such construction and occupation would not have been approved, or, if it was not approved, some remedial action taken.

50.  The plaintiff also relies on the facts of the issue of the approval for the cockloft in 1964, the renewal of the Crown lease in 1988, and the continued grant and renewal of general restaurant/bakery licences for the Property since 1992.  It is true that the Government may act in different capacities, and that, for instance, it cannot be assumed in the absence of evidence that the District Lands Office can override the Building Authority or assume its statutory functions; see Wong On v Lam Shi Enterprises Ltd, MP 2549 of 1995.  But it is very difficult to imagine that the Authority would have approved the cockloft if it had had any evidence of unlawful erection of the building itself, or that the Crown lease would have been renewed if there was any lack of compliance.

51.  Finally there is the point mentioned above, that the occupation permit is evidence that the provisions of the Buildings Ordinance have been fully complied with in the construction of the building.  The only enforcement action to which it could be relevant is in respect of some contravention when the building was first erected and occupied.  That happened in or before 1947.  As I have indicated, such a contravention would now be practically impossible to prove.  No sensible authority would now seek to do so.

52.  I am therefore satisfied that even if the Building Authority has the power to take such enforcement action now, which I do not accept, I can be sure, and the defendant’s solicitors could have been sure that the defendant could safely disregard the risk. 

Conclusion

53.  I am satisfied that the defendant had no grounds, whether arising from the presence of the cockloft or the absence of the occupation permit, on which it could rely to rescind the Agreement. The defendant wrongfully repudiated the Agreement and the plaintiff validly accepted the repudiation.

54.  There will be judgment for the plaintiff as prayed for in the Originating Summons, with costs (nisi) to be taxed if not agreed.